PUTIN AND TRUMP SEE OIL PLAYING KEY ROLES – TRUDEAU THE OPPOSITE

Making Russian energy GREAT again

PUTIN AND TRUMP BOTH SEE OIL AND GAS RESOURCES PLAYING KEY ROLES IN ATTAINING GLOBAL POWER

CALGARY• Donald Trump and Vladimir Putin are both fixated on a kind of restoration: returning their respective countries to a certain past level of greatness. The two enjoy an unlikely — if not tenuous — kinship, but the two energy-powerhouse leaders also see their respective country’s vast oil and gas resources as a powerful tool in wielding global influence.

Trump has vowed to unleash an oil and gas production bonanza to create jobs and reduce imports from perceived enemy countries, while the Russian president has already spent the past 10 years building the country’s ramshackle oil industry and reducing its dependence on energy exports to a hostile Europe.

Putin’s “goal has been to get Russia to a place where the West — and first and foremost the United States — has to take it seriously,” said Jeff Mankoff, the author of Russian Foreign Policy: The Return of Great Power Politics and a senior fellow at the Washington-based Center for Strategic and International Studies.

During his time in power, Putin has secured major oil contracts with China, injected hefty investments in Middle East gas fields and raised the country’s profile in energy markets by collaborating with the Organization of the Petroleum Exporting Countries ( OPEC) as part of a grand ambition to expand his sphere of influence in both the Middle East and Eastern Europe.

Perhaps encouraged by a softer foreign policy position under former U.S. president Ba rack Obama, Putin has gradually reasserted Russia as a major power in places such as Syria and Ukraine.

Trump could further help Putin realize his broader foreign policy ambitions, particularly if the new U.S. president follows through with his suggestion of lifting sanctions on Russia.

An easing of the sanctions — imposed by several countries including the U. S. after Russia annexed Crimea from Ukraine — would ease financial and technological restrictions on the country.

“The sanctions period was a very serious stress test for the Russian energy sector,” said Igor Yusufov, who served as energy minister under Putin between 2001 and 2011.

Early in his tenure, Yusufov was among the Russian diplomats who met with U.S. energy corporations during a series of summits between 2001 and 2003 to discuss partnerships between the two countries.

Though many proposed partnerships collapsed as relations between the two countries soured, he said the talks laid the groundwork for Exxon Mobil Corp.’s involvement in Sakhalin-1 in Russia.

“Our hope is that with these political developments (in the U.S.), we will have the possibility to implement all the projects we discussed,” he said.

Yusufov may get his wish as Exxon’s former president Rex Tillerson, who spearheaded the Russia push on the U. S. side, is expected to assume the powerful role of Secretary of State in Trump’s administration.

The lifting of sanctions is a critical factor in modernizing Russia’s economy and unlocking value from its most complex and geologically challenging oil and gas fields.

BP PLC pegs Russia oil reserves at 102.4 billion barrels of crude oil along with 32.3 trillion cubic metres of natural gas — the second largest conventional reserves in the world — but much of it in difficult terrain and far away from its export markets.

Without sufficient foreign investment, the country faces dwindling oil production that would cut into government coffers. Russia generates more than 50 per cent of its GDP from commodity exports, and its oil production of 11.34 million barrels per day last year was second only to the U.S.

Russia’s energy sector has remained relatively healthy since oil prices crashed in late 2014, mostly due to the falling value of the ruble, various cost- cutting measures and a tax regime tightly linked to oil prices. Russian oil remains profitable well below US$ 20 per barrel, according to estimates by Citigroup.

But the long- term prospects of the industry are beginning to dim as U. S. sanctions enter into their third year.

“We’re kind of at that critical point now where that combination of low oil prices and sanctions are starting to take their toll,” said Emily Stromquist, an analyst at Eurasia Group based in London.

The U. S. sanctions, enacted at the beginning of March 2014, that put restrictions on foreign investment and the selling of western technology put a damper on Russia’s nascent Arctic and tight oil prospects.

Only one of the six proposed oil and gas developments in the Arctic is currently moving ahead, as western sanctions made most projects untenable, including Exxon’s joint- venture gas development Sakhalin-1, which most observers thought would be exempted from sanctions.

Likely, most of the Arctic developments would have been uneconomic even in the absence of sanctions. But experts see massive potential in the country’s untapped tight oil reserves, most of which lie within the massive Bazhenov tight oil basin in western Siberia. The basin is similar in size and scope to the Bakken formation in the northern U.S. and Canada.

“It’s probably superior (to the Bakken), but we don’t have enough data on it to be certain,” said Ronald Smith, an analyst at Citigroup based in Moscow.

Exploiting Bazhenov’s reserves would likely require the application of U. S. technologies that are banned under sanctions.

But Smith said the geology of the Bazhenov might not be the biggest challenge; instead, it may be what’s above the surface.

“West Si beri a is t he world’s largest swamp,” he said. “The average depth is 10 to 20 metres, and it’s a difficult place to operate. ( But) below the surface, it’s actually brilliant.”

Without a substantial expansion of its reserve base, Russia’s oil and condensate output will not maintain current levels over the next 20 to 30 years, according to a forecast by the Moscowbased Energy Research Institute of the Russian Academy of Sciences.

“This was how Russia had intended to keep up its record-high levels of production over the longer term,” Eurasia Group’s Stromquist said.

To compensate, Russia has been aggressively finding new buyers for its product.

In May 2014, months after U. S. sanctions were placed on Russia, it signed a blockbuster US$400-billion, 30- year contract to supply gas to China. If the deal, which had been stalled for decades, is fully realized, it will substantially tilt the balance of Russia’s natural gas exports to the Asian nation.

“It would allow you, depending on the route, to play Europe and China off of each other,” CSIS’s Mankoff said.

The massive supply contract came amid a number of new natural gas pipeline proposals aimed at bypassing eastern European countries such as Ukraine and Belarus, allowing Russia to avoid political backlash from western European countries should it decide to use its gas supplies for political purposes.

The proposals included the Nord Stream pipeline that supplies Germany with natural gas via the Baltic Sea, effectively sidestepping the Baltic States. Another was South Stream, geared toward delivering gas to Bulgaria and beyond via the Black Sea, though the project was abandoned in 2014. That same year Russia proposed the replacement pipeline Turkish Stream, which would pass t hrough t he Black Sea to supply Turkey and, potentially, other markets.

Indirectly, this all plays into Putin’s desire to establish a country that, as Mankoff said, envelops “not just Ukraine, but the entire concept of a Russian sphere of influence.”

Russia has also pursued similar deals in the oil business.

In December, Rosneft PJSC, Russia’s largest staterun oil producer, bought a 30- per- cent stake in a major Egyptian gas field from Italy’s Eni SpA for US$ 1.6 billion. Days earlier, Rosneft finalized a US$ 5- billion investment from Qatar’s sovereign wealth fund as part of a larger US$10.6-billion sale.

Russia also agreed to curb its oil production alongside OPEC and non- OPEC countries for the first time in 15 years, vowing to cut supplies by 300,000 barrels per day.

However, its growing confidence may not be enough to secure investments of as much as US$ 1.8 trillion, according to the International Energy Agency, that are needed to stabilize oil and gas supplies till 2040. On average, upstream oil and gas alone require US$59 billion a year.

Moreover, while t he Russian energy sector has withstood oil’s downturn relatively well, the broader economy is showing signs of weakness, said Sergey Aleksashenko, a former chairman of Russia’s central bank between 1995 and 1998, and senior fellow at the Brookings Institute.

Private consumption over the past two years has fallen 15 per cent, and widespread corruption continues to worry investors.

Whether domestic discontentment could eventually hamper Putin’s foreign ambitions is unclear. But his approach to the West, though it may be warmer under Trump, is fundamentally unchanged.

“He ( Putin) believes to a great extent in Cold War mentality,” Aleksashenko said. “And that’s why if the West is weaker, it’s better for Russia.”